There is undeniable power in social media. But does that mean there’s profit for shareholders —- particularly new money?
The bull case for both Facebook FB, +1.25% and Twitter TWTR, -0.31% boils down to their scale and ability to connect in meaningful ways. After all, Facebook boasts a staggering 2.2 billion monthly users worldwide on its platforms — roughly 30% of the entire planet’s population. Using Twitter, President Trump has disrupted politics by pushing out his messaging directly. Tech icon Elon Musk instantly added 10% to the value of Tesla TSLA, +1.44% in August after a tweet about a half-baked plan to take the company private… and faces a Justice Department investigation as a result.
However, criticism of these companies is growing, centered on privacy, efficacy and the potentially harmful aspects of social media.
Many Facebook and Twitter investors remain bullish on these stocks, and there are solid arguments for that. But there are also serious causes for concern as third-quarter numbers loom large for both stocks in about a month.
In nasty quarterly reports published in July, Twitter posted a 1-million-user decline in its audience. Facebook posted its slowest growth rate in history — and its most valuable U.S. user base flat over the first quarter. If the third-quarter data continues this trend, the pain investors have seen lately could only be beginning.
As we approach these very important earnings dates, consider a few words of warning as to why the end of both stocks’ run may be nearer than they think.
Facebook and Twitter shares, by the numbers
Increasingly, the potential for stock-market outperformance is a hard narrative to swallow in both cases.
Sure, Facebook has seemingly rallied nonstop for five years; shares are up 220% since September 2013 to lap the S&P 500 more than three times over. But the stock is in the red year-to-date.
Twitter’s narrative is pretty much the opposite, with strong returns of about 70% in the last 12 months. But its share price remains far below its first printed price of about $45 share after its 2013 IPO and only modestly above its actual offer price of $26.
Worse, the short-term history of both stocks has been very rocky; Facebook is down 15% in the last three months and Twitter has lurched more than 30% lower in the same period.
The reason is a rather ugly pair of earnings reports this summer. Facebook was pummeled as much as 20% in the wake of a second-quarter earnings report that offered up weak guidance on top of a revenue miss and slowing user growth. Twitter topped that with a single-session plunge of 21% after disclosing it had purged fake accounts, causing its user base to shrink significantly.
What Wall Street analysts are saying
Perhaps unsurprisingly, Wall Street analysts have started to take a more cautious view of both companies.
In July, after the account purge, Pivotal Research Group dropped Twitter stock to a “sell” rating with a $22 target. An analyst at MoffetNathanson in September gave the stock an even worse $21 target, warning that “Twitter’s extreme valuation will come back into focus” soon.
And while some like Recode’s Kurt Wagner and Rani Molla applauded the move to clean up the platform, they noted it’s disturbing for the company to seemingly have to choose between health and growth. The pair wondered in July whether “cleaning up Twitter [is] such a demanding job that the company can’t continue to make ‘product improvements designed to deliver growth in audience and engagement’? … It seems reasonable to expect it to be able to do two things at once.”
On Facebook, most Wall Street analysts held to a “buy” rating even after the disappointing earnings. But their moves on price targets were telling. Stifel slashed its 12-month target on Facebook from $242 to $202, and JPMorgan Chase made a similar reduction from $242 to $205 — both cuts of more than 15%.
This week’s departures of Instagram co-founders Kevin Systrom and Mike Krieger are adding to the worries. The loss of the Insta execs was called “concerning” by one JPMorgan analyst, and a “notable negative” in the words of an analyst at CFRA.
Read: 3 fresh Instagram worries for Facebook investors as Zuckerberg faces his biggest test
Less quantifiable threats
The Instagram-related bearishness isn’t just because of the potential for brain drain. While Facebook doesn’t break out details of Instagram in its financial filings, a post-earnings conference call recently noted that Instagram boasts over 1 billion monthly active users — and losing focus on that platform is indeed a concern.
More importantly, most tech insiders have held up Insta as a cleaner overall platform and experience than the eponymous core of Facebook —- free from the softer, more toxic threats endemic to both Facebook and Twitter.
There’s allegations of political bias or fostering “fake news,” which have been hard for Facebook to shake in the last two years — most recently via 275,000 shares of an obviously doctored picture of Trump amid the floodwaters of Hurricane Florence.
There’s the resulting threats of regulation that forced Twitter and Facebook execs to Capitol Hill earlier this year to try to defuse allegations that they are running media monopolies.
Oh yeah, there’s that whole Cambridge Analytica mess caused by Facebook being careless with user data, and separate regulatory threats that focus on privacy instead of the First Amendment.
Most disturbing of all, there’s an ever-increasing body of evidence that social media platforms like Twitter and Facebook are simply terrible for people’s emotional well-being. Teenagers are turning to plastic surgery at an alarming rate thanks in large part to body-image issues driven by image sharing, cyberbullying is driving up suicide rates, and rarely does a week go by where the sordid underbelly of social media isn’t exposed in a new alarming headline.
But hey, Facebook is going to get into get into the dating business. What could go wrong?
The growth numbers of prior years undoubtedly captivated investors, particularly at Facebook, because of the sheer potential offered by social media platforms. But after ugly second-quarter reports for both companies, the numbers simply don’t seem to be there right now.
We’re still a good month away from the next round of earnings reports, but the latest headlines and share-price pressures hint that now may be time to get out of these stocks while the getting is good.
Also read: Facebook stock can’t keep up with Twitter, and the Instagram news isn’t helping
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